Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:19]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:39]

Thank you, Mary, and welcome to Risk Parity Radio. If you have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing. Expect the unexpected. There are basically two kinds of people that like to hang out in this little dive bar. You see in this world there's two kinds of people my friend. The smaller group are those who actually think the host is funny regardless of the content of the podcast.

Mostly Voices [1:13]

Funny how? How am I funny?

Mostly Uncle Frank [1:17]

These include friends and family and a number of people named Abby. Abby someone.

Mostly Voices [1:21]

Abby who? Abby normal. Abby Normal.

Mostly Uncle Frank [1:33]

The larger group includes a number of highly successful do-it-yourself investors, many of whom have accumulated multimillion dollar portfolios over a period of years. The best Jerry, the best. And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases of their financial life.

Mostly Voices [2:03]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. Exactly.

Mostly Uncle Frank [2:14]

But whomever you are, you are welcome here. I have a feeling we're not in Kansas anymore.

Mostly Voices [2:19]

But now onward to episode 312.

Mostly Uncle Frank [2:22]

Today on Risk Parity Radio, just gonna do what we seem to do best here, which is answer your emails.

Mostly Voices [2:30]

You need somebody watching your back at all times. And so without further ado, here I go once again with the email.

Mostly Uncle Frank [2:40]

And, first off, we have an email from Allison.

Mostly Voices [2:51]

and Allison writes hi Frank you're probably

Mostly Mary [2:55]

following this year's lack of demand for U.S treasuries everyone is talking about this would naturally happen as the U.S debt Rises uncontrollably as we Finance everyone's War with borrowed money and U.S debt rating gets downgraded real wrath of God type My question is regarding the correlation of the stock bonds portfolio. Do you think that the inverse correlation as we always experienced will change in the long run given that U.S. Treasuries aren't the safe haven they used to be? Meaning big institutions and foreign governments won't seek our debt as before when stocks crash. No crystal ball here, just trend analysis.

Mostly Voices [3:37]

Thoughts? I know this world is killing you, oh and Well, am I following this year's lack of demand for US Treasuries everyone is talking about? Oh, I'm aware of it.

Mostly Uncle Frank [3:56]

I'm not sure everyone is talking about it. Maybe everyone on typical financial TV. It's just one data point of many.

Mostly Voices [4:05]

You can't handle the crystal ball. And we've heard that story before.

Mostly Uncle Frank [4:12]

You can't handle the dogs and cats living together. But it sounds like you've been watching too much of that TV, because you were talking about US debt rises uncontrollably as we finance everyone's war with borrowed money and US debt rating gets downgraded. That sounds like it came exactly from financial TV. So I think what you really should be thinking about is what is the purpose of the way those people speak on those kinds of programs. And the purpose is to attract clicks and eyeballs because that's what the advertisers pay. And in order to attract clicks and eyeballs, you need to infuse as much drama into your presentations as possible. Fire and brimstone coming down from the skies.

Mostly Voices [4:59]

Rivers and seas boiling. 40 years of darkness. earthquakes, volcanoes, the dead rising from the grave. And so what mostly financial TV does is go around looking for things to cry about. It's just like all of TV news.

Mostly Uncle Frank [5:14]

If it bleeds, it leads. That is one of the oldest statements in journalism going back to newspapers. And it's true, and it works. But what is the other purpose of financial TV and financial media? It is to support directly or indirectly the financial services industry.

Mostly Voices [5:36]

And what are those people doing? Always be closing. Always be closing.

Mostly Uncle Frank [5:41]

Because if you look at who advertises and who appears often on financial TV, it is people from the financial services industry who are interested in selling you various products And one of the best ways to sell products is to get fear going. Fear, uncertainty and doubt. FUD marketing is how you sell lots of things to protect you from whatever calamity is supposedly on the horizon here.

Mostly Voices [6:14]

Because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Uncle Frank [6:21]

Hedges and buffers and guarantees. Oh my. Hedges and buffers and guarantees. Hedges and buffers and guarantees.

Mostly Voices [6:29]

Lions and tigers and bears. Oh my. Lions and tigers and bears. Oh my. Lions and tigers and bears. Oh my. Lions and tigers and bears. Oh my. Lions and tigers and bears.

Mostly Uncle Frank [6:45]

The other thing you should recognize about this topic in particular, US debt and interest rates, is that most of the experts and commentators on this are what you would call hedgehogs. Now, if you study forecasting and experts, look up Philip Tetlock and super forecasting in particular, he divides experts into two categories, foxes and hedgehogs. Foxes know a lot of different things. Hedgehogs know one big thing. And when you're talking about hedgehogs and financial expertise, you're talking about people that say the same thing all the time. Either the market is crashing, or having a recession, or we're having an inflationary episode, and they make that same prediction every year, all year, all the time. Write books and newsletters about it. get on TV for spouting whatever they're spouting. And so those people are always going to look for whatever data point is around as confirmation bias to quote, prove unquote whatever it is they're trying to push forward. So they end up predicting, you know, 10 of the last two recessionary episodes or 10 of the last one inflationary episodes. Frank Vasquez：Which means they're really bad at predicting anything. And this is a good way to eliminate most of the noise in most of the people you hear. If you listen to a lot of this stuff, you'll know what camp people fall under. And once you know they're a hedgehog and they're in one camp or another, you can pretty much discount everything they have to say. Because the only people you should ever listen to are what are called the foxes. So these are people that are trying to account for every data point. And what you'll know about them is that they've said different things at different times. And so they are willing to change their minds and willing to admit when they are wrong. Now these people are actually not that popular in financial media because they don't provide the kind of drama a hedgehog provides and the kind of certainty very precise and precisely wrong that a hedgehog kind of person provides.

Mostly Voices [8:58]

We have been charged by God with a sacred quest.

Mostly Uncle Frank [9:07]

But what you have written sounds exactly like it came from the hedgehog community on the US debt is spiraling out of control, hyperinflation, blah, blah, blah. Been hearing that for 25 years or more. He didn't fall?

Mostly Voices [9:16]

Inconceivable.

Mostly Uncle Frank [9:21]

Ever since 1971, when we went off the gold standard, we've been hearing that story. Maybe it'll come true someday, but we may all be dead by then. Dead is dead. And that's the other thing about forecasting. Unless you put a time on it, this event will occur by this time or at this time. It's not really a forecast. It's just pontificating into the wind. Now, as to your question, do you think that the inverse correlation we always experience will change in the long run given US Treasuries aren't the safe haven than they used to be, meaning big institutions and foreign governments won't seek out our debt as before when stocks crash. No crystal ball here, just trend analysis thoughts. Well, you're operating from an incorrect assumption because treasury bonds and stocks are not always inversely correlated. We cited to a paper here in episode 309. I'll cite to it again. It's from Duke University. It's from somebody you would describe as a fox, not a hedgehog. And they present data there going back to the 1950s showing how the correlation between treasury bonds and the stock market tends to change over time. And it's largely related to when we have recessions or recessionary environments. That is when you see the biggest inverse correlations between bonds and stocks. And you see more positive correlations in inflationary environments and in particular when the Fed is raising interest rates. And that data is in Appendix 1 or A, I can't remember which of that paper, but I'll cite to it again in the show notes and you should take a look at that so you can start from a correct premise about how this actually works because it does not work the way you think it does. That's not how it works. That's not how any of this works. So no, this time it's not different in that respect. And will big institutions and foreign governments still seek out our debt as before when stock markets crash? Well, yes, because they have to, because it's still the cleanest dirty shirt in the bin, if you will. There's nothing to supplant US currency or US debt as the world's reserve debt and currency. and that kind of process takes about 60 years for it to change from one to another. There's a nice discussion of this in one of Ray Dalio's principles books. He calls them all principles now and it's getting very confusing. Anyway, the one where he does the 500 year history of various rises and declines of various countries and their economies. One thing that is interesting of that analysis is the data shows that the change in the reserve currency is probably one of the last things that happens, and it always happens after that country ceases to be the world's preeminent military power, or at least that's how it's always worked in the past. Now, oddly enough, he doesn't apply that history correctly to current events, but if you're looking for a past pattern to look for, that's what I would look for as to when another country's MilitarY becomes preeminent over the US and dominates the world the way the US does. Now, after that, then I would start looking for a substitute in the reserve currency. Until that time, as long as most international transactions in the world are conducted in dollars, people are going to be using US debt and US dollars, and they will be in high demand. because if you owe debts in dollars, then you need things that are denominated in dollars in order to meet those debts. And the other thing you can also see is that foreign governments will frequently still float their debt and denominate their debt in US dollars. So another country will put debt out in New York in the form of US dollars. And as long as other countries are doing that, that is also a sign that the US dollar and US debt remains preeminent. The reason they do that is they can't float it in their own currency. Nobody wants it. Surely you can't be serious. I am serious. And don't call me Shirley. Well, that is all part of what they call the Euro dollar system, which is all of the dollar denominated transactions, debt, and other things that are floating around out there that are actually not connected with the US at all. It's kind of misnamed as the Eurodollar system. If you want to know all about the Eurodollar system, there is a podcast called Eurodollar University run by a guy named Jeff Snider that puts out seemingly a little podcast every day and all he does is talk about these kinds of issues. Now, he's kind of a hedgehog himself because he's always predicting recessions and things like that, but he does give you a lot of historical background on various things. a lot more than other people do. So if you're interested in that sort of thing, I would listen to that. I would look up anything by a guy named Lacy Hunt, who was with the Fed back in the 1970s, and so has decades and decades of expertise in this area. And if you want to hear a couple people constantly debate this, go listen to the podcast or YouTube videos from Simplify. the ETF provider Simplify Asset Management. There are a couple guys there, one named Mike Green who's on the strong dollar recessionary kind of thing, and then a guy named Harley Bassman who's on the other side of that coin. But they both work together and get to fight about this, so you get to hear both sides of the debate. So anyway, there's probably not really anything special actually about the era we're in, at least with respect to the US dollar and foreign wars since there's always wars going on. So I would say this time is not different. If anything, we are seemingly to get back to a more normal interest rate environment where we're not down at 0% interest rates and we're not at 10% interest rates. We're like at three or four or five or something like that, which historically has been kind of a average place to be. So I guess my message is move along and nothing to see here. Hopefully that helps in some respect though, and thank you for your email.

Mostly Voices [16:01]

My aim is true. My aim is true. My aim is true. My aim is true. My aim is true. My aim is true.

Mostly Uncle Frank [16:44]

Second off, we have an email from Kenny.

Mostly Voices [16:49]

On a warm summer's eve on a train bound for nowhere.

Mostly Mary [16:53]

And Kenny writes, hi Frank, I have a stupid question for you. My portfolio is yielding about $18,000 a year now and my safe withdrawal rate is at $36,000 a year. As you can see, half of it is provided as monthly, quarterly dividend and interest payments. How do I factor that in my strategy? I mean, 2% of the 4% rule is already provided in cash, so I'd only need to sell up to 2% of my portfolio per year to live off of, correct? That's my assumption, but I wonder if that's how it works and if there's a better way of approaching this in practical terms. Thanks, Kenny.

Mostly Uncle Frank [17:34]

Well, Kenny, I think you're making this more complicated than it needs to be. You got to know when to hold 'em, know when to fold 'em. There is nothing special about dividends or income coming from a portfolio that is one part of the total returns in a portfolio. All of the calculations about 4% rules or other things are done on the basis of total returns, and that includes any income being thrown off by the portfolio. So in terms of the calculations, that doesn't really matter. Forget about it.

Mostly Voices [18:10]

The only thing that really matters about it is that is actually a disfavored

Mostly Uncle Frank [18:13]

way of getting your returns these days. You would prefer to get your returns as capital gains that you can time and that are taxed at a more favorable rate than getting them in the form of income because you're forced to pay taxes on those in a given year. And depending on what kind of income they are, it might be at a much higher rate than long-term capital gains rates. So in terms of your projections, you should ignore the income as a separate category of things. It's all part of the one total return. In terms of management, it can make it slightly easier if you're getting some income off of something because you can just spend that income if you're in a decumulation scenario, which is another management technique that once you get to decumulation, You should turn off any automatic reinvestment of dividends and things because it will actually make the portfolio overall easier to manage because you can either spend that cash or use it to rebalance into whatever needs rebalancing at the time. If you reinvest, then you just end up with more transactions, which can cause problems tax-wise or with wash sales or other things. Now, if you're only taking $36,000 a year out of this thing, then you're probably not going to have many tax issues at all. Although you are in the 0% long-term capital gains tax bracket, so if you had more of your portfolio not in income producing things, but as something that pays only long-term capital gains, then you're not going to be paying any taxes at all. and you're going to be better off in that respect, at least for things in taxable accounts. Obviously, if they're in a retirement account, you're going to pay no taxes on a Roth anyway, or pay ordinary income when it comes out of a traditional IRA. But no, I don't think that's a stupid question, particularly given the misinformation I see out there about these issues. You know, I got friends of mine who live and die by the actuarial tables, and I say, Hey, It's all one big crapshoot, anyhoo. Because there still is this tendency amongst many to treat dividends and income as somehow different from the rest of the gains in your portfolio. And that's just not true. Forget about it. It might have been true in the 1980s when you had to pay transaction fees, but we don't have to pay transaction fees on selling little pieces of our portfolio anymore, so it's not true anymore. to the extent it ever was true.

Mostly Voices [20:52]

Anyway, hopefully that helps and thank you for your email. Every gambler knows that the secret to surviving is knowing what to throw away, knowing what to keep, because every hand's a winner and every hand's a loser and the best What you can hope for is to die in your sleep.

Mostly Uncle Frank [21:21]

Last off, we have an email from Steve. Hey, Steve. And Steve writes, hi, Frank and Mary.

Mostly Mary [21:32]

I've listened to episodes 55-57, 199, 214, 216, 218, and 224. where you talk about managed futures in some depth, but still have a couple of questions. I apologize in advance if I've missed where you've already addressed them. One, if one were to use a managed futures fund like DBMF or KMLM, what type of account would it be best suited for? Traditional versus Roth retirement account versus taxable brokerage account? Two, using the Golden Ratio Portfolio as an example, which asset classes would be worthy candidates to lower allocations to in order to make room for managed futures. I've heard you say you are considering swapping the REITs in the Golden Ratio Portfolio for managed futures, but is that just for your sample portfolio purposes or does it have something to do with the qualities of REITs in particular? My REITs are quite uncorrelated with everything else in my portfolio So I'm hesitant to cut them from the portfolio if there are other asset classes I could consider taking from instead. Stocks, long-term treasuries, gold, thoughts? Thanks for your contributions to us DIYers. Still my favorite podcast each week, Steve. I'll get you, hey, Steve, if it's the last thing I do.

Mostly Uncle Frank [22:58]

All right, good questions. I think we We talked about the first one in the last episode, but let's talk about it explicitly again. So your question was, if one were to use a managed futures fund like DBMF or Kamlm, what type of account would it be best suited for traditional versus Roth retirement account versus taxable brokerage account? And the answer is the traditional retirement account, because these things do pay off distributions periodically, generally at the end of the year. They're generally taxed at ordinary income because they are reflective of the transactions that have occurred over the course of the year involving buying or selling futures contracts and other instruments. And so in order to avoid that, the best place to put it is in the traditional retirement account. You could put them in a Roth because there are no taxes in a Roth either, either in the account or coming out of the account. The issue there is that you would not expect these funds to have the same long-term return potential as your stock funds. They're going to be somewhere between what you would expect out of a bond fund and what you would expect out of a stock fund. So something like a 5% to 7% real return as opposed to a 7 to 9% real return for a stock fund and something more like 2 to 4 for a bond fund after inflation. Now I suppose if you had lots and lots of room in your Roth retirement account, you could certainly put one of those in there and it would be better than putting a bond fund in there, but it probably wouldn't be as good as putting a stock fund in there. Or your crazy leveraged things or your speculative Bitcoin stuff. But that is my answer and I'm sticking to it.

Mostly Voices [24:47]

Will Laddie Frickin' Die?

Mostly Uncle Frank [24:52]

All right, second question. Using the Golden Ratio portfolio as an example, which asset classes would be worthy candidates to lower allocations in order to make room for managed futures? Well, you might want to go back and listen to episode six on this, where we first talked about the Golden Ratio Portfolio. Now the way this is structured when you look at it is the base is having 42% in stock funds and 26% in treasury bonds. Now that leaves you 32% to essentially work with to put in other things. And the idea behind this portfolio is that you could make it more conservative version where say you put 10 or 15% in a short term bond fund, or you could make it more aggressive where you're essentially putting additional stocks in that 10 or 16% slot. And so there's a lot of wiggle room with that 32%, which is generally occupied by the 16, the 10 and the six, which could be divided some other way that is not mandatory that you use 16, 10 and six. That just is what the golden ratio is between those various allocations. Now generally you do not want more than about 25% of a portfolio to be in alternative assets like gold or managed futures or those sorts of things. So if you, for instance, made managed futures the 16% You might only want 6% in gold or at most 10% in gold. Or you could switch those two. Or if you wanted a more conservative version, maybe short-term bonds are 16% of the portfolio and managed futures are 10 or six and gold is the other 10 or six. As you can see, this ends up having a lot of flexibility to it. And the idea of it is that it's a basic template and then you can modify it to make your portfolio either more conservative or more aggressive. So it could look more like a standard 60/40 portfolio, or it could look more like the Golden Butterfly portfolio, which is only 40% in stocks. In terms of your specific question on keeping the REITs, yes, you could keep the REITs, but you could make them as part of your stock allocation, that 42% because REITs are in fact stocks. They just have a quality of being more diversified from the overall stock market than most other sectors. And in that case, you would just cut back on whatever you're holding as part of that 42% allocation, put in the rates for that, and then move the managed futures into whatever position you think you'd like to have them in.

Mostly Voices [27:50]

Groovy, baby!

Mostly Uncle Frank [27:54]

And yes, the changes I'm proposing making in our sample portfolios are simply for the purpose of having a more diversified sample portfolio because it's more interesting for illustrative purposes.

Mostly Voices [28:06]

Top drawer, really top drawer.

Mostly Uncle Frank [28:10]

Although I can say that we are moving towards a 10% allocation to managed futures in our personal portfolios. Yes! And finally, I think probably the thing to be aware of is that different managed futures funds have different volatility characteristics, which also affect their return characteristics, and that in this circumstance, I know that KMLM is more volatile and has potentially higher returns than DBMF. Generally, although they haven't really been around that long, so it's hard to say that that is a definitive statement. DBMF is designed, however, to be kind of like an index fund of trend following managed futures following the SOC Gen index. That's what it's trying to replicate. Whereas KMLM is using more of a proprietary formula, if you will. Now there is also the relatively new one, CTA, and there are other ones that are coming online kind of as we speak. I did find a nice little article from a website called Picture Perfect Portfolios comparing KMLM with DBMF and CTA and a couple other ones that did not make the cut. And I'll link to that in the show notes so you can check that out. I don't have a particular opinion of the article since I haven't read it that closely yet. But I'll leave it for you to check out. Yeah, baby, yeah!

Mostly Voices [29:41]

I'm glad you're enjoying the podcast and thank you for your

Mostly Uncle Frank [29:45]

email. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com put your message into the contact form and I'll get it That way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, follow, give me some stars or review. That would be great. M'kay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. And somewhere in the darkness, the gambler he broke even.

Mostly Voices [30:32]

But in his final words, I found an ace that I could keep. You got to know when to hold 'em, know when to fold 'em, know when to walk away, and know when to run. You never count your money, when you're sittin' at the table. There'll be time enough for countin', When the deal is done, you got to know when to hold 'em, know when to fold 'em, know when to walk away, and know when to run. You never count your money when you're sittin' at the table.

Mostly Mary [31:18]

There'll be time enough for countin' when the deal is done. The Risk Parity Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.